Auditor Relationships – What you can do to make them as painless as possible

1. Auditor Relationships – What you can do to make them as painless as possible Presented by Matthew Lenton , C.P.A. MAYER HOFFMAN MCCANN P.C. 2301 Dupont Drive, Suite 200 Irvine, California 92612

2. Relationship with your Independent Auditors • Open communication • Trust and confidence • Independent Auditors vs. Internal Accountant 2

3. Being prepared before the audit • Have a plan • Make a list of everything • Consider prior year AJE’s as a part of the year end close process • Assign each task to a specific person • Establish dates (milestones and deadlines) for each task • Follow up 3

4. Be Prepared for Planning Meeting • Go through minutes for the fiscal year • Keep a file for “the auditors should know about this” • Identify for auditor unusual or difficult transactions recorded during the year and areas where internal control might be weak 4

5. Being prepared during the audit • Client’s audit liaison person should have weekly meetings with client finance personnel that are supporting the audit process • Keep Finance Director informed • Consider obtaining approval from Finance Director to re-arrange priorities as appropriate • Keep auditors informed (they may have an alternative way to satisfy themselves for a particular account balance) 5

6. Year end entries • All year end entries need to be posted before the audit starts • Hard to audit a moving target • Look over adjustments posted last year by finance • Look over adjustments detected by auditor last year • Once audit starts, agree to not keep on posting entries unless material (agree on amount) 6

7. Supporting schedules • Need to be prepared by start of audit • This is a part of properly maintained accounting records • Agree year end balance to detail of what that balance is composed of • Proper internal control—what have you done to insure that the year end balance of significant assets and liabilities is composed only of appropriately determined year end amounts 7

8. Supporting schedules • Make sure that the supporting schedules agree with the final balances for significant assets and liabilities 8

9. Call auditor if not ready • If you might not be ready, call the auditor • Don’t wait until two days before the audit team is scheduled to start their audit • This might be “good news” for the auditor • Auditor might be able to accommodate your request • Provides opportunity for “cleaner” records • Maybe the assigned audit personnel needs more time to wrap up other assignments • Key is giving enough notice and being flexible 9

10. Analysis During the Year • Reconciliation of general ledger cash balances • Review of significant revenue and expense balances with significant variances (from prior year amounts or from budget) • Capital asset records 10

11. Communication • Emphasis of Risk Assessment standards • It is a sign of good internal control to know when to call the auditors for help • Inform auditors if you didn’t have time to get to something • Identify for auditors issues that might warrant special audit consideration • You want the auditors (not the press) to help you deal with potential “problem areas” 11

12. Take Ownership of Financial Statements • Perform a meaningful review • Don’t need to ascertain make-up of every number • But should question and look into amounts that “don’t look right” • You know the financial activity of your organization better than the auditors • Required by new auditing standards • Obtain and review disclosure checklist prepared by auditors (or prepare for them) • Understand audit adjustments and GASB 34 entries 12

13. Take Ownership of Financial Statements • Client’s review must be sufficient to detect misstatements that are “more than inconsequential” • Obtain and review disclosure checklist prepared by auditors (or prepare for them) • Understand audit adjustments and GASB 34 entries • “Let go” of insignificant changes 13

14. Be Communicative • Keep the auditors in the loop • Call the auditors with questions during year • Ask for help with difficult or unusual transactions • Identify areas where need training 14

15. Be Responsive to Variances Detected by Audit • Use auditor’s analytical review inquiries to identify potential misstatements (“things that don’t look right”) • Read the representation letter that you sign (use as checklist of “things that I should be telling the auditors about” 15

16. Internal Control • Understand that role of auditor’s internal control “feed back” has changed • All matters communicated (unless clearly inconsequential) 16

17. Internal Control • Implement appropriate recommendations • It’s OK to disagree (but let auditors do their job and make their recommendation) • In response explain why recommended changes are not being made (cost vs. benefit, etc.) • This is part of the process 17

18. Internal Control • Keep auditors “honest” during discussion • “What is the fraud scenario that your recommendation is designed to correct” • Alternative controls may be in place 18

19. Risk Assessment auditing standards • Basic principle: client (not auditor) is responsible for establishing proper internal controls • Be able to demonstrate strongly supported ethical culture • Ethics/fraud policies • Known protocol for reporting unethical conduct • Monitoring controls • Internal risk assessments 19

20. SAS 114 Communications with those charged with governance (financial reporting oversight): • Audit adjustments (both booked and waived) • Disagreements with management • Difficulties in performing the audit • Major misstatement risks addressed by the audit • Significant estimates inherent in the financial reporting process • Roles and responsibilities of management and auditor 20

21. SAS 114 • Audit committees are not required • Timing and form of communication depend on the circumstances • Auditor must be able to effectiveness of two way communication • The more serious the issues communicated, the more important to communicate them in person • More routine communications can be done in writing 21

22. Be aware of upcoming GASB standards • GASB 53 — Accounting and Financial Reporting for Derivative Instruments • GASB 54 — Fund Balance Reporting and Governmental Fund Type Definitions • Proposed GASB Changes Affecting the Inclusion of Component Units in the Reporting Entity (GASB 14) 22

23. Significant Auditing Issues • Recovery Act – Significant impact on OMB Circular A-133 Single Audits • Significant increase in grant funding • High level of reporting requirements • Additional compliance requirements • Buy American Provisions • Increased Federal oversight • Financial distress • State and local government budget issues and revenue decreases 23